AGILENT TECHNOLOGIES INC. $32 (New York symbol A; Aggressive Growth Portfolio, Manufacturing & Industry sector; WSSF Rating: Average) is the world’s leading maker of testing and measurement equipment.

Companies in telecommunications, electronics and medical sciences use Agilent’s equipment to improve the quality of their own products. Agilent gets about two-thirds of its revenue from customers outside of the United States.

Revenue fell from $8.4 billion in 2001 (fiscal years end October 31) to $6.0 billion in 2002 after the company sold a division. The end of the tech boom also cut demand for its products. Revenue rose from $6.06 billion in 2003 to $7.2 billion in 2004, but slipped to $6.9 billion in 2005.

Restructuring spurred turnaround

Agilent’s losses grew from $0.89 a share (total $406 million) in 2001 to $3.78 a share ($1.8 billion) in 2003. But the success of a restructuring plan increased its earnings to $0.71 a share ($349 million) in 2004, and to $0.99 a share ($494 million) in 2005.

In late 2005, the company sold its struggling chipmaking business for $2.6 billion as part of a new restructuring plan. It also sold other operations for $949 million. Agilent used the cash to buy back roughly $4.5 billion worth of its shares.

Verigy spin-off coming soon

Agilent is now in the process of spinning off its chiptesting business as a separate company called Verigy Ltd. (Nasdaq symbol VRGY).

It recently sold 15% of Verigy to the public for $121 million. That helped establish a market for Verigy, and a following among brokers. Agilent aims to hand out its remaining shares to its stockholders by the end of fiscal 2006.

We’ll take a closer look at Verigy when details of the spin-off become available.

Two core businesses

Agilent now plans to focus on its two remaining divisions: Electronic Measurement makes testing equipment for products such as mobile phones (70% of revenue); and Bio-Analytical Measurement, which makes equipment that iden- tifies the chemical and physical properties of substances (30% of revenue).

Right now, Agilent spends around 14% of its revenue of $12 a share on research. Accounting rules force the company to treat these outlays as an ordinary expense, which hurt its earnings.

But this high commitment to research has helped it develop several new technologies. In fact, wireless communication testing products now account for 60% of the Electronics Measurement division’s new orders.

Demand for wireless testing products should continue to grow, particularly as more countries upgrade their cellular networks to handle high-speed traffic.

More buybacks on the way

Agilent is debt free, and has $2.25 billion ($5.50 a share) in cash. It will likely use this cash to buy back more stock, rather than make acquisitions. That will improve Agilent’s future per-share earnings and cash flow.

The stock is highly volatile, and trades at 21.3 times its forecast 2006 profit of $1.50 a share. Earnings should grow to $1.75 in 2007, which implies a p/e of 18.3. That’s cheap for a world leader like Agilent.

Agilent is a buy.